Core Sector growth subdued as oil and cement show negative growth

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The core sector growth for the month of February 2017 came in subdued at just 1%. This is one of the lowest core sector numbers over the last few months and is also below the annual average. Core Sector, essentially, consists of 8 key industries that form the building blocks of economic growth. Core sector is also relevant to IIP growth as it constitutes nearly 38% of the overall IIP composition. The core sector growth had taken a minor hit after the demonetization and therefore a pick-up in core sector is the key to evaluating whether there is a recovery happening after the government started its remonetization process in January this year.

How the Coal sector contributed to core sector growth…

Coal has a weightage of 4.38% out of the 38% weight that core sector has in IIP. For the month of February coal production was up by 7.1% on a YOY basis. While part of the growth may be attributed to the low base in February 2016, there has also been a conscious effort from the government side to push coal output. Also the demand for coal from the power sector has picked up in the recent months and that is reflected. In a way, this sector has a direct bearing on the power sector since power production in India is still largely a thermal game.

How hydrocarbons contributed to the core sector growth…

Consisting of oil drilling, natural gas production and oil refining; this is one of the key components of the IIP. Al l the 3 components disappointed in the month of February. Let us look at oil extraction first! Crude oil production declined by (-3.4%) in the month of February and that could be largely explained by lower oil prices. Globally, many shale oil wells in the US became viable after the Brent Crude prices moved up post the OPEC deal in November 2016. This combined with the record inventories in the US tended to depress oil prices to below the $50/bbl mark. Natural Gas production also declined by (-1.7%) for the month of February 2017 and the pricing has been a major issue here also. Also, many gas fields are yet to go on stream and the situation could change in coming months. Lastly, refinery products also declined by (-2.3%) for the month of February. This weakness in production is visible across all the major downstream companies in India. Collectively, these 3 segments of the hydrocarbons space constitute for 12.87% out of the 38% that core sector contributes to IIP. Considering that hydrocarbons constitute almost a third of the core sector growth, a recovery in this segment overall will be key to a revival in the core sector growth.

How the Fertilizers sector fared in the overall core sector growth…

Fertilizer production declined by (-5.3%) for the month of February and this could be largely an aftermath of weak demand post-demonetization. Many farmers had been hit badly by the shift in focus towards non-cash transactions and that did create a major disruption across rural and semi-urban areas for agricultural production and for fertilizer demand. However, with the sowing season for the Kharif to commence in a couple of months the demand for fertilizers is likely to pick up in the coming months. One hopes that the monsoons do not play truant this year!

How the Steel sector contributed to the core sector growth…

Steel consisting of alloys and non-alloys constitutes a key component of the overall core sector. In fact, steel constitutes a little less than 1/5th of the core sector and hence is critical in creating alpha for the core sector number each month. Steel was the clear outperformer for the month of February 2017, with a sharp growth of 8.7% on a YOY basis. Steel production in India has received a major boost from the government in the form of minimum import price (MIP) support as well as imposition of countervailing duties on select steel products. Steel was a major victim of dumping from China, Japan and Russia and the government’s intervention has helped the industry boost its production and also improve its profitability. With the government keen to continue its protective cover for the Indian steel industry, there is an opportunity for them to produce their way out of their debt positions. Steel is likely to stay buoyant.

Cement was the major disappointment for the core sector…

Other than oil, the big disappointment for the core sector growth came from cement. It can be argued that cement does not have as high a weight as hydrocarbons but it needs to be remembered that cement sector has strong externalities. For an overall recovery that is sustainable, the core sector needs to be spurred by the cement sector. For the month of February 2017, cement production fell by 15.8% and it can be largely attributed to the pain in the aftermath of the demonetization. Cement is a business where a large chunk of the transactions happen in cash and therefore it got impacted both at the production level and the dealer level. Also the slowdown in private construction during this period subdued the demand for cement.

Electricity remained flat for February…

Electricity increased by 1.5% for the month of February 2017. Electricity is the single largest item in the core sector and constitutes nearly 1/3rd of the core sector growth and 1/10th of the overall IIP production. The improvement in coal production also indicates at a pick-up in electricity production. With renewable energy also being included in the calculation of electricity growth, we could see much more traction going ahead as more renewable production goes on stream.

The core sector for the full year has grown by 4.4% and that is fairly encouraging. But the monthly core sector numbers need to show traction if the IIP has to pick up commensurately. One only hopes that remonetization starts to show its impact on the core sector growth.

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